For many Americans, giving to charity is a way of life. According to a study by Giving USA, Americans made $389.05 billion in charitable donations in 2016, alone[i]. Whether it’s through lump sum donations during the holiday season or continuous giving throughout the year, such contributions truly add up.
While your motivations for giving may be completely selfless, you will still want to make sure you are getting back as much as you can in terms of the tax breaks you deserve. Increase your tax refund and get more back from the IRS next year by using these five ways to maximize your tax deductions from charitable contributions.
For those looking to make the most of their charitable contributions this tax year, it is important to know how much you are eligible to itemize. According to the IRS, you can deduct at least 20% of your Adjusted Gross Income (AGI) if you are using itemized deductions.[ii]
However, most individuals qualify for up to 50% in deductions for their monetary charitable contributions. That means if your AGI is $200,000, you may be able to deduct $100,000 in contributions on your next tax return.
Many of the most popular nonprofit organizations - including churches, hospitals, colleges, and privately operating foundations - qualify for a 50% deduction. Make sure to inquire whether the organization is a 50%-limit organization when you donate.
The IRS also instituted AGI restrictions for individuals and couples making over a certain amount. If your charitable contributions go beyond 20% of your AGI, make sure you work with a tax professional to get the most out of your deduction.
Use our charitable donation calculator to find out how much your donations could be worth in tax savings.
The little things can add up fast when it comes to the charitable contributions you make. That’s why it is important to keep a record of every dollar you donate.
A weekly five-dollar donation at your local grocery store checkout or seasonal drop-off of used clothing may not seem like much in isolation, but can make a considerable difference to your final tax deduction. The key is to keep receipts for every donation that you make throughout the year. The IRS requires written confirmation from organizations for cash donations of over $250.[iii] However, keeping proof of all donations in a file, receipt box, or spreadsheet will help you realize your full deduction potential come tax season.
Several companies have even created apps to help keep track of your charitable donations throughout the year to ensure that you get your highest deduction.
Not sure what you can deduct? It may be more than you think. A black-tie charity dinner? You are able to deduct anything that exceeds the fair market value of that dinner.[iv] A good rule of thumb is to keep a record of every expense related to donations and events with a non-profit 501(c)(3) organization. You can always reevaluate those expenses when preparing your taxes in the spring.
For donors with a diversified financial portfolio, it may be more lucrative to donate stocks or bonds to their favorite charities rather than cash. Looking to alternative methods to give back can go far beyond just making the donor feel good.
The IRS rewards donors of stocks and bonds by not imposing the capital gains tax.[v] Donating a stock to a charity allows donors to give more than they would be able to if they sold the stock, paid capital gains on it, and then donated that money to the charity.
Here is one example of how donating stock can help you save even more while giving back to others:
You purchased $2,000 worth of shares of one stock that is now worth $10,000. If you were to sell that stock, you would be required to pay capital gains tax on an $8,000 gain. Donating that stock will provide your favorite charity with $10,000 and you are able to deduct the fair market value of the stock as a charitable contribution – without capital gains.
This is only a tax advantage when it comes to a rising stock. If your stock has depreciated, it may be better to sell off your stock so that you can claim the loss and donate the cash funds received from the sale.
Do you or your spouse spend time each month giving back by volunteering your time? There could be a few small tax incentives that you may be missing out on. While there is no write-off available for the hours you spend helping others, there are related ways to make deductions.
If you travel to an office to volunteer or part of your volunteering requires use of your car, you are able to deduct 14 cents for each mile of your commute. You are also eligible to deduct the cost of uniforms that may be involved in your volunteering duties.[ii]
For those with culinary skills, spending hours cooking and baking to donate to a charity fundraiser not only costs you hours in the kitchen, but also money out of your pocket. Those ingredients are also a write-off.
Make sure you are taking full advantage of these potential write-offs and including the costs in your tax-prep records.
Looking at long-term tax deductions? There is an opportunity to get an added tax incentive through your individual retirement account (IRA). Putting funds into a traditional IRA is a great way to get a tax break while saving for retirement.
When retirement does come around, you will be required to take distribution from your IRA when you are 70-and-a-half. That may come with large tax implications and a significant increase in your AGI.
If you have donated throughout your life and are looking for a way to grow your retirement savings while delaying large tax bills, a recent law passed by Congress could be the perfect solution. In 2015, Congress passed a law that allowed individuals to contribute up to $100,000 to charity directly from their IRA when they reach 70-and-a-half.[vii] This donation is referred to as a Qualified Charitable Distribution (QCD).
Your QCD allows you to remove the funds required by law without the tax implications normally associated through withdrawing from your traditional IRA. A QCD is limited to $100,000 per year per IRA owner.[viii] If you are looking for an additional avenue to donate and avoid capital gains, a QCD may be the right option for your retirement.
Do more with your money and make your income go further. By spending time monitoring your volunteer work and donations, you will be able to increase your tax return – which you can turn around and send right back to your charity of choice.
If you would like information about how you could make the most of your tax return by opening a Premium Money Market Account, please contact us by phone at 1-877-472-9200 or by email at customerservice@ufbdirect.com.
[i] "Charitable Giving Statistics," National Philanthropic Trust.
[ii] "Publication 526," Internal Revenue Service.
[iii] "Donations: How to Maximize Your Tax Deduction," Investopedia, April 4, 2011
[iv] "Eight Tips for Deducting Charitable Contributions," IRS.gov, March 22, 2011
[v] "Five Items to Donate for a Charitable Tax Deduction," US News, November 21, 2014
[vi] "Qualified Charitable Distributions (QCDs) from IRAs," Forbes, April 28, 2016
[vii] "Qualified Charitable Distributions," TheBalance.com, December 22, 2015
This insight was published by UFB Direct on April 10, 2019 and last updated on April 10, 2019.